Mkt factoring in 25 bps rate cut; like cement, cap goods: UTI MF

Companies which put up capacity in the recessionary phase gain in the recovery phase, says Lalit Nambiar of UTI MF. In that context, he likes cement and capital goods companies.

He also advises investors to stay away from commodity stocks as there are too many moving parts and terms it as a 'global call'.

On the Reserve Bank monetary policy meet on April 5, Nambiar says the market is already factoring in a 25 basis points rate cut.Below is the verbatim transcript of Lalit Nambiar’s interview with Anuj Singhal and Ekta Batra on CNBC-TV18.Anuj: The talking point for last two days has been the way we have seen sell-off in pharmaceutical stocks, fresh round of sell-off. Are you getting a bit of a déjà vu kind of feeling in pharmaceutical names, is that a sector that you would avoid right now? A: Partly the markets do focus on the price movement but if you look at a fundamental level, a couple of things are playing out there. You had USFDA scrutiny increasing over the last few years and perhaps significantly in the past few months. You have just mentioned one name which saw reaction to USFDA action or announcement.There is also the fact that the patent pipeline in terms of patent expiry’s, the kind of focus which even second rung companies have been able to give to these molecules, has been such that the competitive intensity has increased which essentially means that you need to focus a little bit more on companies which can go for those really high risk binary kind of molecules where the spin-off benefits can be very huge if you get it right or you go for specialty generics and that is the kind of companies you need to focus on rather than the plain vanilla ones unless there is a significant improvement in profitability or the nature of product which they are bringing to sell in the United States. So, these are the three things you will really look for in pharmaceutical companies.Ekta: Wanted to ask you about Cairn India and maybe the oil and gas space in general. For Cairn in specific, the stock has recovered 25 percent, Brent crude has recovered around 40 percent plus from the lows in January. What is your sense in terms of whether you would be a buyer in oil and gas stocks such as Cairn? A: I think when it comes to upstream, it is largely a call on what is going to happen on crude. So, now if you look at stocks which are in the upstream space and if you look at where crude is heading, we really don’t have a view on that but what we do understand from people who study that space, companies such as British Petroleum and others, the outlook they have given out is that perhaps in the next one year, it will take about a year for the excess supply and the demand, the incremental supply and incremental demand to sort of match up. To that extent, I think it is still a question mark as to where upstream oil is going to go in terms of profitability because it is largely a question of where crude is going to go and that matter is not yet settled so I would probably be a little bit circumspect about that space. Anuj: What would you buy right now, it is a market which is still been bottom-up for quite some time now, what kind of stocks would you buy right now?A: We have been sticking to our stand. We have been reiterating it many times, I think it is a question of whether you follow the business cycle and whether you believe there is a business cycle and the economic indicators are looking up. We do think that there are early signs. We are saying look at the early part of the cycle, look at what does really well in a recovery part of the cycle and there are companies to some extent I would call them manufacturing cyclicals which significantly benefit in a recovery phase and that is been borne out by data in the 90s as well as in the noughties. So, if you look at 1992 to 1994 and look at 2003 to 2005 space, that timeline tells you that companies which put up capacity perhaps in the recessionary phase actually get huge benefits in the recovery phase when the volumes recover. So, the operating leverage benefits are huge. So, sectors like cement and capital goods are places where we would like to stay.Ekta: In terms of further triggers for the market as a whole what would you be watching out for globally as well as domestically? A: I think there is a Fed meet in a couple of days. Tonight you will probably see that happening, you will see the sort of statements coming out by Thursday night I presume and then you have Reserve Bank of India (RBI) April 5 – those are two things to watch out and then you have the forecast on the monsoon somewhere in the middle of April. So, I think those are things which the market will want to look at. Anuj: Any commodity stocks that you would want to buy in terms of a change in cycle? A: We are staying away from commodities because that is the global kind of call. It is a call on what is going to happen all over the world including China, what would happen in the European Union (EU), Russia. So, I think there are too many imponderables there, I don’t think we are quite equipped to really look at that; too many moving parts there. Ekta: What is your sense in terms of what we could expect from the RBI and do you think that the move or a likely move is already factored into the markets?A: The sense we are getting is that the market seems to be already looking at probably one cut of 25 basis points; that is the sense we have got. (Interview transcribed by Priyanka Deshpande)